Western consumers bought tea, silks and other Chinese commodities for which they paid in silver. The Chinese did not need much of Western goods – like India. To correct this negative balance of trade, Europeans promoted opium in China. When Chinese resisted the Opium trade, wars followed.

Major opium trading companies like Jardine Matheson, David Sasoon & Company and sundry traders set up The Hong Kong & Shanghai Banking Corporation for facilitating this misery. The Chinese Opium problem was finally solved by several draconian measures during Communist rule.

5. Wars In China

When Chinese resisted the Opium flood, Western traders resorted to war. The Japanese emboldened by new found wealth and military technology, joined Western powers. The Sino Japanese Wars, The Opium Wars with Europeans and The Boxer Uprising before WW1 imposed large war reparations on the Chinese. The Civil War in China between the world wars destroyed Chinese commerce systems. The Cultural Revolution has left the Chinese commercially backward.

In 1500, the approximate exchange ratio between gold liang and and silver liang was 1:4. Today it is 1:50. Silver mineral deposits, mining and availability is more elastic than gold. Elasticity of gold production is very low. Secondly, above ground supplies of gold are far higher than known below the ground estimates. Hence, manipulation of gold prices over a period of time is difficult.

Touchy … feely … selly … silly …

7. Current Status

China, as the world’s largest holder of US dollar debt is constrained in its move to increasing gold reserves through market operations. A dollar sell off by China could collapse the world’s currency system – and the biggest loser would be the Chinese! But a negotiated conversion of some dollar reserves to gold is eminently possible.

China has become the world’s 3rd largest consumer of gold – up from a 100 tons to 350 tons. The Shanghai Gold Exchange has made it easier for individuals to invest in gold. They have reduced the transaction size from 1 kg to 100 gm.

China’s investment in US$3 billion in Blackstone Private Equity /hedge fund, was the first by any country. This gives China an inside track to the world’s largest hedge fund and private equity player. The Blackstone Fund on the other, gets access to the world’s largest liquid reserve – more than 1 trillion dollars of the Chinese Government’s monetary reserves.

The Chinese will not agree to any ‘hare-brained’ scheme by ‘tin-pot’ dictators, who are sitting on some raw materials – and think that the future belongs to them. The world has so many of this variety, that it does not require me to be specific.

The Chinese need to acquire some big ticket assets – maybe, some big US companies, for about US$1.5 trillion and bring down their reserves to US$0.5 trillion. This will reduce US outstanding debt, create demand for US stocks, lift the Dow Jones, and create value for the dollar. As I see it this is the only way that the Chinese can cash in their chips. The House will not let them take it away any other way.

10. What does this mean for others

China, the largest creditor nation in the world, carries a big stick. They are not democratically accountable and transparency is not required from them. Hence, a significant conversion from dollar holdings to gold is feasible, can be done quietly (hence, at an economic price) and with trade power they have, a strong negotiating position is a given.

And that is an opportunity others may not get!

In the last 150 years, strong monetary gold reserves have been a feature of Western monetary systems (acquired mostly, by dubious means like slavery, genocide). China’s moves, if any, will diversify global monetary reserve systems away from the dollar and the West and spread the weightage in a more equitable manner – giving rise to speculation about a renminbi bloc.

its (gold) reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in an interview with the Xinhua News Agency today. China, the world’s biggest gold producer, has increased its holdings before, Hu said in the interview carried on the administration Web Site. They rose from 394 tons to 500 tons in 2001 and to 600 tons in 2003. The U.S. has the world’s biggest gold holdings at 8,134 tons, followed by Germany with 3,413 tons, World Gold Council data show. France has 2,487 tons and Italy 2,452 tons, while the IMF has 3,217 tons, according to the council.

The increase makes China the world’s fifth-largest holder of gold, just ahead of Switzerland, and among the six nations plus the International Monetary Fund that have reserves of more than 1,000 metric tons. Although Hu did not elaborate on where China had sourced the additional bullion, her comments were interpreted as meaning they came from domestic sources and may included refining of scrap metal. Traders also say the gold was accumulated systematically over a number of years. Last year China ranked as the world’s largest gold producer with 12.2% of world output, equivalent to 288 metric tons. The U.S. ranked second with a 9.9% share, or 234 metric tons.

China should increase its gold reserve from 600 tons to about 2,500 tons in a short term and to 3,000 tons in a long term to cope with the versatile exchange rate risks, said Teng Tai, an economist of China Galaxy Securities Company.

Of course, this really does not mean much – except that it may keep gold prices on boil. Whether a currency is backed by a 5% or a 10% gold reserve may not mean much, in this era of rampant use of “a technology, called a printing press” as an economic tool – not just by the US of A. For long term economic stability, gold needs to be in the hands of individuals – and not Governments.

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Quicktake focusses more on current events, recent events, reports, media buzz, matters of topical interests. Typically, Quicktakes are shorter than 2ndlook. Sometimes a few Quicktakes, morph into a 2ndlook post.